good read below for you margin traders: from JDSU thread
lotsa of bears out in the woods...recurrent theme seems to be: "there isn't enough FEAR for the market to bottom but oh by the way I'm selling everything I can get my hands on"...MSFT thread has that stock selling between 0 and 20...this article seems to be a sane explanation to me
EJ
To: David Todtman who wrote (9363)
From: Gut Trader Saturday, Apr 22, 2000 7:13 AM ET
Respond to Post # 9364 of 9384
Even the Cmgi Ceo held hostage by the bear. Found the link to this message on smartmoney.com.
By: dwether
Reply To: None Saturday, 15 Apr 2000 at 6:47 PM EDT
Post # of 114560
To all on the Raging Bull message boards:
I am sharing my perspective here in the hopes that it might help some better understand what has been going on with the market, in general, and Internet stocks, in particular. Perhaps all of this has been posted. If so, consider it further affirmation, but I have been too busy to be able to notice. Being a public market CEO, I am not free to comment on what might happen in the markets, but I am free to share my perspective on what has happened, so here goes. One caveat: These are my opinions and only my opinions and are offered up solely for consideration and discussion, not as investment advice.
It is not a simple situation. Involved are many factors, including:
1. the sharp run up in the tech and Internet sectors in the last six weeks of 1999, creating significant tax payments due April 15, 2000.
2. the amount of stocks purchased on margin, which is partly responsible for the late '99 run up,
3. too many companies going public that were not ready,
4. several unrelated events which occured within a short period of time, in particular:
- Abby Joseph Cohen's comments on her lightening up on stocks,
- predictions by a Goldman analyst that Microsoft would miss their revenue target,
- Safeguard Scientific stating that they are done investing in B2B,
- the CPI hitting .7, and
- the put to call ratio hitting a low on or around March 10, which coincided with the highs of the market. (Admittedly, this last event may be, in part, what precipitated Ms. Cohen's comments.)
Individually, no one of these factors was enough to cause the crash we have just experienced, but taken together, they were more than the market could bear.
If I had to attribute the recent sharp selloff to one factor, it would have to be the policy of the SEC allowing clients of brokerage firms to purchase huge amounts on margin. Many firms have open policies allowing up to 100% on margin. Depending on your balance sheet, some firms allow almost 200%. This causes sharp run ups in good times and even sharper declines in bad.
In a way, the Internet is responsible for the volatility in the markets. The Internet has accelerated the number of individual investors. This coupled with the aggressive margin policies of many of the online trading firms has exacerbated market directions. It is a new reality of the new economy that the SEC needs to take into consideration in setting margin policies.
This ability to buy such large amounts on margin may not have had as severe an impact in the past, because there were not as many individual investors with so much money to invest in the past. Also, there had never been so much wealth created in a short period of time as the last six weeks of 1999. By January 1, 2000, the stage was set for disaster, which is why we have experienced such extreme volatility this year. It is not the fault of these individuals, for it is human nature to take full advantage of what rules permit. Sometimes we need to be protected more from our nature and from the realities created by new phenomena, such as the Internet driving more individual investing.
Case in point: Tremendous tax payments were due, and many that made huge gains in the last six weeks of the year did so primarily in the tech and Internet sectors. Hoping to further these gains, many left much, if not all, of their money in these sectors until tax time and many were on heavy margin. Selling to cover taxes helped cause prices to decline, producing margin calls, producing more selling, and so on. Layer on the unrelated events mentioned above, and it produced not just a bear market, but a crash.
In my humble opinion, due to the significant increase in individual investors in the market, I believe it is time for the SEC to review ways to ratchet down the amounts allowable on margin.
Someday, hopefully soon, enough pundits will come out and say that the market is oversold, encouraging institutions to get back to the business of investing, but until margin rules are altered, expect continued volatility in the markets from time to time. Certainly, this does not help anyone recover losses, but understanding better what has happened may help prevent the recurrence of these unfortunate recent events in the market. Until the SEC makes a move to protect us from our nature when it comes to buying on margin, we will need to rely more on self discipline. Unfortunately, throughout history, when it comes to investing, self discipline has not been one of our better traits, especially as a collective. For this reason, we need institutions to help guide our behavior.
If we are in a healthy economy, and for the most part, we are, markets should not crash. This points to one or more faults with the market system. IMHO, the only fault here is the amount we are allowed to invest on margin.
Respectfully Submitted,
David
smartmoney.com |
